Institutions such as pension funds will pour more than $500bn into hedge funds in the next four years, accounting for more than half of the expected inflows.
According to a study by Casey, Quirk & Associates and the Bank of New York due to be released on Tuesday, global institutional investment in hedge funds will exceed $1,000bn by 2010 – up from $360bn today. US institutional investment has doubled in two years, to about $140bn.
Institutions’ share of hedge-fund assets will rise to 40 per cent, from 30 per cent today, continuing a decade-long trend which is reshaping the industry as it moves away from its original foundation of high net worth investors. The study said that two-thirds of the institutional money would be from retirement plans.
The move is fuelled by the search for returns by pension funds. A conventional portfolio consisting of 60 per cent equities and 40 per cent bonds might return less than 7 per cent a year, which was inadequate to meet the requirements of a retirement plan, the study pointed out.
Institutions expected returns of 8 to 9 per cent or more from their hedge fund investments, and most of those questioned in the study said they were satisfied with their returns to date. Hedge funds have traditionally returned more than 10 per cent a year.
The report said that only 15 per cent of large institutions globally had hedge-fund investments, although this varied greatly by region. By 2010, about a quarter of all institutions were expected to invest.
The biggest investors were US foundations and endowments. US institutions were more likely than those elsewhere to invest in hedge funds, with about 10 per cent of US corporate pension funds having such investments compared with only about 3 per cent of UK corporate funds.
The study said that the growth of hedge funds was having an impact on mainstream investing, which was increasingly adopting alternative investing strategies, such as shorting, derivatives and leveraging, favoured by hedge funds.